Dear Reader,
As investors, it’s essential to understand that for the near to medium term, the economic and investment outlook is the polar opposite of the rosy picture painted by officialdom and the quislings on Wall Street.
Because that understanding is so important to your wealth protection, we have taken it upon ourselves in these musings to dispel the dangerous fictions with countervailing facts and, hopefully, informed opinion.
Depending on how long you have been a dear reader, you have heard us warn – for months now – that the recession wasn’t over; that gold was one of the few secure asset classes and was going higher; that residential real estate would stumble again, and much more that is now becoming apparent to a wider audience.
That said, while it is important to view the immediate outlook for the economy through a justifiably negative filter, it is equally important that we don’t lose hope as that, too, can lead to bad decision-making.
By virtue of this publication’s fairly large circulation – around 100,000 – I get a lot of email. And I can tell you that there are some dear readers who are really, really upset with the state of things. They feel betrayed by their government, shafted by the colluding banks, robbed of their economic futures by slothful fellow citizens… in short, frustrated to the point of breaking by the sharp degradation of the American dream.
So much so that in some cases correspondents use what might be termed injudicious language – the sort that would be hard to explain in an innocent context, should it ever be dredged out of the ether in order to be trotted out as evidence.
To all of you who are swept by such strong emotions, all I have to say is… take a deep breath. Quoting the title of an early 1980s book by Paul Watzlawick, the situation is hopeless, but not serious.
And so it is that, in something of a change-up, I’d like to focus on the good news in store for America and the world.
In yesterday’s edition of these musings, I talked about the need for people to “get real” with their expectations for what the government can provide. That admonition was not meant to be of an ethereal nature – a soft chastisement – but rather a statement of the hard fact that the era of unfettered and unsupportable politically motivated spending is coming to an end.
A full recognition of this reality will still take some time, but not much. Witness the quick retribution applied to Australia’s mightily misguided former Prime Minister Kevin Rudd – laid low good and fast by virtue of his unswerving support for a heavy new tax on mining, that country’s number one industry. Reality bites.
One can also point to the austerity budgets now being trotted out by various governments around the world – except the U.S. Sure, at this point they are too little, too late – hardly anything more than a politically motivated rearranging of deck chairs. Soon, however, events on the ground are going to force these governments to get serious about their budget slashing.
Related, the odds grow with each passing day that a new currency regime will materialize from this mess. Of course, as the debate on this new regime grows in intensity, the politicos will attempt to preserve their powers of fiat money creation; that ship is now in the process of being holed below the waterline by the iceberg of reality. We the people, and of all the developed nations, will soon remember the benefits of monetary restraint.
The net result – the good news – is that smaller government, operating under hard restraints – is a near certainty before this is over. And that’s just for starters…
Most people tend to view the ascent of humankind as a steadily rising line. However, other than the fairly steady introduction of certain lifestyle accoutrements, the quality of life – evidenced by our daily activities – doesn’t really change all that frequently.
Case in point, before the industrial revolution, most people worked on a farm… as they had for millennia. Sure, their farm implements might have improved over time from wood to iron, but they still spent the same long hours, day after day, stooped in their fields.
Then, finally, came the Industrial Revolution, and some sizable percentage were able to show their backs to the fields, moving instead onto the factory floor where they remained in hard toil for another century… at least in what is called the West. In China and elsewhere, this transition is still underway.
Thanks to what I might call the Technology Age, I think that most Chinese will be able to skip the whole factory thing. I say that because while it was technology that allowed humankind to move off the farm and, in time, out of the factory, in the era now emerging, technology will not be so much a means to an end, but both the means and the end.
To make the point, albeit a bit circuitously, I’ll recount my experience at one of the Lundin family’s zinc mines in Sweden. The mine was located smack dab in the most picturesque little village you can imagine. If you didn’t know there was a mine there, nothing would tip you off to its presence. Even more notable was that the mine, both above and below ground, was as tidy and clean as it was unpopulated. In fact, with the exception of literally a handful of workers, the heavy industry of mining and crushing ore was proceeding almost entirely on autopilot.
This is a good example of how technology is taking the human component out of even the most hardscrabble of industries. While the motives behind such innovation are invariably tied to improving profitability by avoiding draconian laws related to the hiring and firing of workers, the net result is fewer humans forced to work in grueling labor.
Which brings us back to the Technology Age we are only just now entering. By the time this era is fully in evidence, I believe we will see…
So, how’s that for optimism? A long and largely leisurely life, where the biggest challenges you’ll face in a day will be the decision of what delectable to eat and which of the world’s many entertainments you’ll avail yourself of.
Threats to this utopian vision? Someday I may look back on this edition of the Daily Dispatch in embarrassment, but I don’t see how the world just described – or something close to it – will fail to materialize.
I say that because I don’t see how the next level of computational power can be derailed, and that is key to much of what is envisioned. Likewise, the social networking technologies and cultural adoption of same, key to keeping future power-grabbers in line, are well advanced. The rest should just pretty much fall in line.
The world as we know it will soon be dead. Long live the new world!
Happy now?I found the opening paragraphs of the following article, from the New York Times yesterday, to be particularly revealing about how badly the government has botched its handling of the housing bubble.
CASA GRANDE, Ariz. — Fannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords.
Bill Bridwell, a real estate agent in the desert south of Phoenix, is among the thousands of agents hired nationwide by the companies to sell those foreclosures, recouping some of the money that borrowers failed to repay. In a good week, he sells 20 homes and Fannie sends another 20 listings his way.
“We’re all working for the government now,” said Mr. Bridwell on a recent sun-baked morning, steering a Hummer through subdivisions laid out like circuit boards on the desert floor.
For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage one hour from Phoenix. The Congressional Budget Office predicts that the final bill could reach $389 billion.
Fannie and Freddie increased American home ownership over the last half-century by persuading investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors.
Rather than actually making loans, the two companies — Fannie older and larger, Freddie created to provide competition — bought loans from banks and other originators, providing money for more lending and helping to hold down interest rates.
“Our business is the American dream of home ownership,” Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. Here in Arizona, during a housing boom fueled by cheap land, cheap money and population growth, Fannie Mae executives trumpeted that the company would invest $15 billion to help families buy homes.
As it turns out, Fannie and Freddie increasingly were channeling money into loans that borrowers could not afford. As defaults mounted, the companies quickly ran low on money to honor their guarantees. The federal government, fearing that investors would stop providing money for new loans, placed the companies in conservatorship and took a 79.9 percent ownership stake, adding its own guarantee that investors would be repaid.
The huge and continually rising cost of that decision has spurred national debate about federal subsidies for mortgage lending. Republicans want to sever ties with Fannie and Freddie once the crisis abates. The Obama administration and Congressional Democrats have insisted on postponing the argument until after the midterm elections.
I must confess to a mixed opinion about Thomas Sowell, author of one of my favorite books, A Conflict of Visions. On the one hand, he is a sound libertarian thinker. On the other, he was a big supporter of the Iraq war. In any event, in the following article from Investors Daily, he makes some very important points about the implications of the Obama administration’s dictatorial approach to dealing with British Petroleum.
By Marin Katusa, Casey Energy team
To say that oil has been dominating world news recently would be a mild understatement.
With BP executives running around like headless chickens, the Obama administration gnashing its teeth, and energy security plans for the U.S in jeopardy, talk in the energy sector has been all about oil. There have been a lot of important developments lately and it’s easy to have missed one.
So without further ado, here’s a recap of the oil events of the last month or so.
OPEC: “We’re all friends here. For now...”
The OPEC brethren have gone on record to say that “fair for all” oil prices to the tune of US$70 to $80 a barrel will be in effect. For now, we’ll believe this. Right now, collaboration, and not collusion, is in the Dirty Dozen’s best interest.
At these prices, oil-producing companies turn a profit and push on with their exploration programs. The global economy doesn’t fall off the rails, and politicians continue to stay in the office, using oil revenues to foot the bill for some hefty social programs.
But this is OPEC, and as history has proved time and again, the members tend to happily engage exactly the opposite behavior than what the cartel, en masse, agrees to. We don’t expect this spirit of bonhomie to be long lasting, and it’s only a matter of time before they’ll do it again.
Offshore Drilling: The End Is Far from Nigh
Obama may have put a stop to offshore drilling in the United States, but this won’t be a common worldwide trend.
For countries like Brazil, which have worked exceedingly hard to gain energy independence, too much is at stake to follow suit. The oil giants off the shores of Brazil might be hard and challenging to develop, but they hold billions of barrels in reserve – enough to power the fun-loving country for years.
Also getting ready to benefit from petro-dollars is Iraq. While the numbers for Iraq are still unknown – no one has surveyed them since the 1970s – estimates put the country’s oil reserves behind only Saudi Arabia.
Both majors and smaller companies are already setting up operations and spending freely to explore some very attractive prospects. Iraq’s output will double in the next two to five years, and it will soon be an integral part of the oil market.
Game Changer in the Gulf
BP might feel they’re the biggest loser, but it’s not the only company suffering in the Gulf of Mexico. With all deep drilling activities terminated for the near future, the general consensus in the Gulf is that its global competitive edge is gone, and with it any profits to be made.
The oil disaster will see things changing drastically for offshore drilling in the U.S. A besieged and worried Obama administration will come down hard on oil companies, and production costs will skyrocket. We can safely say that higher insurance premiums and increased taxes on each barrel produced are in the offing, along with stricter safety measures and greater liability.
For smaller companies, the Gulf is not the place to be – they’re already packing up and leaving in droves. It is only the oil mammoths that will be able to afford operations, shallow or deepwater, in the Gulf.
The heavy downward pressure on company stocks means that there’s potential to pick up some great stocks at low prices. It is best to hold off on any investments into oil right now, however, till the price of oil corrects and the scope of the Gulf disaster is fully realized.
U.S Energy Security: Look North
The Gulf spill may have changed U.S. priorities, costs, and energy supply for years, but it hasn’t changed the fact that the U.S. still needs energy. And while Obama’s green energy plans may well bear fruit, it will be some time before they can power the entire country.
As many European countries have learnt, it’s best not to let your energy supply be in the hands of someone who isn’t really your friend. But for the U.S., the most likely alternative for domestic oil is the most surprising one – the Athabasca oil sands of Alberta, Canada.
Canadian oil sands are some of the biggest and most controversial oil deposits in the world. But there’s a new technology in town that could revolutionize the entire industry – Steam Assisted Gravity Drainage (SAGD) – and give it a clean bill of health.
SAGD technology essentially pumps steam into the ground to liquefy the stiff heavy bitumen and heavy crude oil, and make it thin enough to be pulled out of the ground. No giant holes in the ground, no toxic tail-ponds or destroyed forests, and no massive amounts of carbon emissions.
It also wins on finances. SAGD has lower costs, requires less capital investments and less manpower than traditional recovery methods in the oil sands. Add that to a smaller footprint, and it’s easy to see why this technology could change things radically.
With the Gulf out of commission, a 25% shortfall in oil production needs to be met from somewhere. And friendly relations between Washington and Ottawa mean that there is no chance of tap-twisting the oil supply – something Chavez’s Venezuela or the Middle East can’t guarantee.
Today, roughly every sixth barrel of oil consumed in the U.S. comes from Canada. As the Athabasca oil sands start to pick up the slack from the Gulf, this number will only grow. Using SAGD will help smooth over the process of making the oil palatable to consumers and soothe environmental groups as well.
But with the majority of the oil sands deposits requiring extraction technologies, only a few companies are at an advantage. They combine expertise with excellent cash flow and are at the forefront of SAGD technology. These are the companies that are positioned to benefit from the upcoming spike in demand. Knowing who they are will help balance out any portfolio affected by the Gulf disaster.
(Looking to follow the latest developments in energy and how to profit? There are big moves afoot across the energy sector. You don’t have to miss out – not when it’s so easy take us up on a fully guaranteed three-month trial subscription to The Casey Energy Report. You’ll be very glad you did, or your money back -- Details here.)
Signing off for the day, I have little doubt that before things get better than any of us can imagine, certain aspects of the current system must break down and be discarded. But, as with so many things in today’s fast-forward world, I think the changeover to a better world will happen quite quickly.
Then, as discussed by Neil Howe in his book The Fourth Turning, and in our Casey Report interview with him, the world will be as different, and as unanticipated, as the 1960s were from the 1950s.
Until tomorrow, thanks for reading and for being a subscriber to a Casey Research service.
David Galland
Managing Director
Casey Research